Ministers are expected to give a reprieve today to 3,000 post offices threatened by closure when the government announces that the Post Office can retain its £1bn five- year contract to distribute benefits to 4.3 million claimants.

The announcement, a fortnight earlier than expected, will delight Labour backbenchers who had thought the government was gearing up to hand the contract to the private company PayPoint.

Unions had warned that this would lead to 3,000 post offices being closed, only a year after the closure of 2,500 had begun.

The government has been under massive political pressure over the contract: 2 million people signed a petition and 265 MPs from all parties signed a parliamentary motion calling for it to stay with the Post Office.

The tender went out in May last year and a decision had been delayed since the beginning of this year, casting a serious shadow over the future of the Post Office network. Earlier this week the all-party business and enterprise select committee reported that government indecision over the account had "destabilised" the Post Office, and the Liberal Democrats staged a Commons debate warning that the uncertainty was leaving the Post Office in a parlous state.

The post office card account (Poca) makes £200m profit a year. Of the 4.3 million people who use Poca, 2.3 million are pensioners.

Critics of the Department for Work and Pensions have warned that the private company PayPoint does not properly service rural areas, unlike the Post Office, since it only has a network of about 20,000 terminals, mostly in newsagents and supermarkets.

Labour MPs claim the DWP has been putting pressure on pensioners to use bank accounts instead of their local post office. The issue of post office closures took centre stage in last week's Glenrothes byelection, with opposition parties opposing the government's plans. The Conservatives had come out in favour of expanding the Poca to allow poorer customers to use it to pay utility bills.

Ministers have been making emollient noises in recent days. A letter leaked to the Guardian showed that the new business secretary, Lord Mandelson, had written to the prime minister proposing a review that might see the Post Office's role expanded into "financial services".

The decision to close 2,500 of the country's 14,000 post offices last year was enormously unpopular, with several members of the cabinet that voted the measure through - Jack Straw, Hazel Blears and Tessa Jowell - campaigning against post office closures in their constituencies. That round of closures had been to reduce the £4m-a-week subsidy the government was providing to the service.

Ministers now appear to have decided that the economic downturn strengthens the case for post offices. They are also keen to improve relations with their backbenches.

In its report, the business and enterprise committee stopped short of telling the DWP that it should choose the Post Office over rival bids, but warned that if its tender was unsuccessful, the decision "would have grave effects on the Post Office network".

The MPs warned that if the Post Office lost the contract, taxpayers could end up paying higher subsidies to maintain the network while at the same time supporting the commercial providers of the DWP card account.

The previous Poca contract, by which the Post Office is paid by the DWP according to the number of people who open and use the account, is due to expire in early 2010.